Podcast

Gold Surging: Buy Mining Stocks? Not So Fast, Says Frank Barbera

by Adam Taggart

With the astonishing recent price rise in gold, many investors are asking themselves: Is now the time to move capital into mining stocks?

Frank Barbera, respected precious metal mining stock expert and editor of the Gold Stock Technician newsletter, has a viewpoint that will likely surprise many. While extremely bullish in the longer term, Frank sees too many risks in the near term and advises smart money to wait.

He cautions:

"I’ve been watching the mining stocks since 1983, so a fair amount of time that I spent watching the group. I have a wide variety of unique technical indicators on the sector, and as I started to see the stock market topping out over the last two to three weeks, I wrote my readers a note to say the mining stocks are also very overbought. Mid-July we saw one of the second most overbought readings on the XAU in five years. And that kind of reading is a big warning, and so I’m not surprised to see them going down. The last letter I put out, I told subscribers that I thought the mining stocks could get cut in half in here, and I’m going to stick with that. I think we’re looking at a 30 to 50 percent decline over the next six months. The XAU, which recently peaked out at around 220, I think you could see that close to 110 before this decline is complete.

So, now, why is that? Really, the truth seems to be that a lot of these assets have been very, very highly correlated and that mining stocks are a "risk on" asset. Now, there are a lot of very competent analysts out there that have been strongly recommending them, pointing to the idea that the stocks are, quote, "cheap." When you look at Barrick Gold or Newmont Mining, you see 13, 12 times earnings, multiples relative to cash flow that are near multi-decade lows. I don’t disagree with any of that. I think that the mining stocks are a great value on the fundamentals.

On the other hand, the equity market looks like it could be heading for a very substantial decline, and I think that mining stocks – they have not shown the ability, at least not yet, to decouple from the equity market. Now, clearly nothing is cast in stone, and I sort of evaluate this day to day, but, you know, if you look at the past data, it really suggests that they’re going to get hit if the market goes down.

And at some point, I think what you’ll see is I’m looking for a bear market in equities over a period of a couple of months. I think during that period of time, you will see gold go through the roof, the physical metal. I also think you’ll see some nice upward progress in silver. I’m in the camp where I think silver is going to act like a monetary metal. Sure, they may pull back here in the short term, but I think there’s a real opportunity there for silver to turn the corner, especially if we get another Jackson Hole special come the end of August with Dr. Bernanke and more QE. I think silver will light up like a firecracker. But, the mining stocks, they need to simply fall to a bigger discount to the underlying metal. And, at some point, then, if we end up getting into a really strong dollar movement of the downside, I think that’s when you might — down the line, a bit — see the mining stocks turn.

Now I also want to make another point that’s very important. I think that ultimately this shakeout in the mining stocks, we don’t have to put numbers on it, but let’s call it a substantial decline. Once that decline is over, I think they will reach a low, probably into the first quarter of next year in 2012. And from that point, I think you’ll see a multi-year bold market in the mining stocks, where they play catch up to where they should be, and then to where metal prices will be. So I think that it’s going to be very volatile, and right now they’re decoupling, and that decoupling may stretch out dramatically, but then they’ll eventually catch up. So I still see an enormous opportunity there, but I think that mining stock investors may have to wait awhile to capitalize on that opportunity."

Also in this interview:

How the technical charts for the dollar are signaling increasing risk of a dramatic downside breakdown in the second half of 2011

The growing risk of the European crisis to further roil the currency markets

Multi-currency strategies for the individual investor

Click the play button below to listen to Chris' interview with Frank Barbera (runtime 40m:45s):

Chris Martenson: Welcome to another PeakProsperity.com podcast. I am, of course, Chris Martenson, and today we are talking with Frank Barbera, one of the top experts on precious metal mining companies and editor of the very well-respected Gold Stock Technician newsletter. In his analysis for investors, Frank overlays a macro outlook on top of a highly rigorous technical analysis and employs a market-timing approach to reduce the inherent volatility within this very high beta sector. So for many years now, Frank has also managed private equity capital, most notably for the Caruso Fund, with particular focus on precious metals, energy, currencies, all things of, I know, intense interest to our listeners here.

Frank, we’re delighted to have you here. With all the recent action in gold, we have a lot to talk about.

Frank Barbera: You bet, Chris. Thank you for having me.

Chris Martenson: Oh, my pleasure. Now, you know, gold’s up 180 dollars an ounce since early July. What do you see as some of the key drivers behind this? You know, how much momentum does this run up have, in your estimation?

Frank Barbera: Well, strangely enough, you know, I know there are a lot of people out there who are saying that gold could be a bubble and that maybe it’s going to come down sharply. Right now, I would strongly disagree with that. I think when you take a survey of what’s going on in the world and you look at Europe, Europe is in the midst of a major banking crisis, a banking crisis that could have widespread contagion from not only Europe but back to the United States through the credit default markets. And the U.S. also has, as we’ve seen now, major debt problems and a very difficult situation in terms of an economy that seems to be relapsing back into recession. And that, once again, is putting massive pressure on the Federal Reserve to try and do something to ameliorate what looks like is shaping up to be another hard landing. You look at all of these factors, and what it adds up to is gigantic uncertainty. And it is that uncertainty which is under-painting the move higher in precious metals. Another important point which your listeners should really take into consideration is the fact that this is a climate where, because global growth is slowing, short-term interest rates, especially here in the United States, are really locked at zero.

Now, depending on what metric of consumer prices you want to look at – let’s say we take this fairly horrible CPI that’s constructed at 2% inflation. Right now you have negative real rates in the United States. And if you go back over a historic period of time and you look at negative real rates and the price returns on gold, gold does very, very well — as long as short term rates are in negative territory. Now, when short term rates are normalized and they move above the rate of inflation, that at that point can become a problem for gold.

I don’t see any way that that’s going to happen for the longest period of time, especially when you start to look at some of the recent economic data that’s coming out of the States. We see very weak employment. We see GDP backward revisions as far as 2003; they went back just recently to downwardly revise the GDP data, the recent quarter coming in at about 0.38 with final demand at around 0.08. So you have a comatose growth situation here in the United States. No growth, chronically high structural employment — that is a situation where it’s impossible to see how short-term interest rates are going to start to move up. So I think negative real rates are here to stay, and gold will continue to surge.

Right now, Chris, the other thing that’s really amazing about all this is like you said, we’ve had this strong move up in precious metals prices, in gold prices. But remarkably, from a technical point of view, we really have not seen any kind of bullish enthusiasm. It’s slowly starting to creep into the market over the last day or two, but I look at dollar-weighted call-to-put options data each day, and that tells me a lot about how much money is flowing into calls and how much money is flowing into puts.

And right now, even though we’ve gone to $1660 on the gold price, we have not seen those call-to-put ratios move up to readings near two and a half or three to one, which would typically tell us we’re getting into a frothy market. They’ve been hovering around 160, 170, and that tells me that there’s still plenty of room to go.

Also, on a momentum basis, if you look at moving average convergence/divergence, which is called MACD or RSI, we’re seeing strong momentum confirmation by the move up in the precious metals — outstanding relative strength. To me, this tells me that gold could easily surge in coming weeks towards the $1800 level, and I have really very little doubt in my mind that we’ll see 2000 over the next two to three months. So I think the price is going sharply higher from here.

Chris Martenson: So against that, though, we see that the USD is up about a full tick today, up almost 1.4% at 75. It looks like a decent pop for the day, but it seems almost maybe stuck in a range. How are you looking at the dollar now, which is the anti-gold?

Frank Barbera: Well, that’s a good point, and I’m glad you brought that up. The one caveat I would have with gold in the short term is that you could see a very short-lived pullback. So this is not something that I think investors should really be terribly worried about, but I could see something, for example, like the GLD pulling back towards, maybe, the 155 to 160. We’re at 160 right now, but about the 155 to 156 area.

So you could have a couple more days of strength in the dollar, and you might get a few more days of short-term weakness in the gold price, but I think within a couple of days were going to make another low in the gold market, and then from there the price will turn higher and begin another large trending move to the upside. So in the very short term, I do think we’re going to see a little bit more dollar strength. The dollar index is at about 75.02 as we speak here on a Thursday morning, up about a buck. I think you could see a push up towards about 77.5, maybe 78, over the next four to five days.

And, now there’s one other little caveat. The dollar is showing a very, very weak pattern. When we talk about poor-quality rallies, this is really the textbook definition of a poor-quality rally. So I’m not really that sure that we’ll even make a move to 77, but I’m allowing for the possibility that it could do that over maybe the next week or so. That could correlate to some kind of a short-term period of weakness in the gold price, and at that point, then, I think we’ll probably start to see signs of a reversal back to the downsize in the dollar and a reversal back to the upside in gold.

So, you know, one of the things I would really recommend to listeners is to not worry too much about short-term moves. This is one of those times you really have to think big-picture. If you’re very concerned about getting the best price, break up the capital that you have into smaller increments and dollar-cost your way into the market in stage tranches, because trying to put too fine a point on any of these markets right now is not the greatest idea. But, for what it’s worth, I do think we’ll see a little more bounce in the dollar and short-term pullback in gold, and then I think gold will reverse higher.

Note: Listeners interested in the conclusions expressed within this interview will also want to read Chris' recent report on The Screaming Fundamentals For Owning Gold And Silver, which takes a deep dive into the data behind the supply and demand imbalances in the bullion markets.

Frank Barbera is one of the top experts on precious metal mining companies and editor of the respected Gold Stock Technician newsletter. In his analysis for investors, Frank overlays a macro outlook on top of highly-rigorous technical analysis, and employs a market-timing based approach to reduce the inherent volatility within this high-beta sector. For many years Frank has also managed private equity capital, most notably for the Caruso Fund, with particular focus on precious metals, energy and currencies.

Join the discussion

12 Comments

The price of gold is much higher than we believe

Does it make sense to destroy the livelihoods of local residents and the environment for incremental increases in the quantity of gold?

>>With gold at $1,600 an ounce, many in the region, one of Peru’s poorest, work the mines for a gram or two of the mineral a week. It is grueling work. Tiny bits of gold in the low-grade ore are teased from hard rock with mallets or crude crushing machines, then refined with toxic mercury in an unventilated house or a corner store.

In the adjacent open-pit mine, teams of men dredge the Ramis River to a depth of 900 feet or more, leaving the topsoil, waste rock and tailings in piles to be washed away by the river. The pit is massive. When I was there in June with a group of my students, I measured it with a GPS at about eight miles long and more than a mile across.

Mining in the area is largely off the books and unregulated. Two large corporations, including one that is state-run, have operations in the area, but the actual extraction is done by "artisanal" miners working for cooperatives. It’s difficult to decipher who exactly controls the cooperatives, but they are generally operated by people with enough money to buy equipment and enough clout to win contracts. Locals say strongmen control different areas of the pit, hiring workers who toil for the chance to occasionally take home what they find in a day. It’s a chaotic, corrupt and brutal place.

The miner who agreed to accompany my students and me this year insisted that this open-pit method of mining was "all natural, without chemicals." But soil samples I took and had analyzed told a different story. They indicated that the waste contained very high levels of arsenic, elevated amounts of lead and detectable levels of mercury.

Soon after open-pit mining began in this basin about seven years ago, sheep and cattle began to die. Downstream, farmers say that since the mining began nothing has been the same. One elderly woman who lived alone in her house on the mountain began to cry as she told me about how her herd of eight dairy cattle died after the river turned opaque with mine waste. Other women in the same community described the death of the river: First the fish died, they said, then the birds went away, then the frogs. Today, they said, not even the smallest creatures, the butterflies and aquatic insects, live along the river. <<

Higher Price of Gold

Thanks for the comment and info, Tall. Like many readers, I own some gold to try to preserve the value of my life savings, but am aware of the negative impacts of gold mining & am not happy about it. Ultimately, value is much better invested in productive activities and capital investments that benefit the living rather than a shiny metal hoarded in a dark bank box or re-buried in the ground – a symbolic embodiment of wealth that often generates destruction as a by-product of its isolation. I’m beginning to convert savings into more useful "resilence" and look forward to the day that the value of isolated, insulating gold pales beside the more real and practical investments that people can make to their mutual benefit, when a little more trust is possible.

Higher Price of Gold

On the Sprottmoney site the product descripton says that the Canadian Maple leafs (or rather Maple leaves?) are mined from Canadian mines. The question is mines in Canadian territory or owned by Canadian registered companies. Anyhow, it’s a bit better for those who weigh all costs.

Thanks for that info Mobius.

Thanks for that info Mobius. Here are my thoughts. By buying gold now, we are in a small way speeding up the demise of the highly destructive ponzi scheme which is destroying the planet by artificially pricing energy and resources low. And then when gold gets repriced much higher after the system collapses, then I will sell it and buy things like productive land and ecosystems (which I will treat well). Therefore, by selling it when demand and price are high, I will be helping to alleviate demand from new mines in the future. So if anything, I think buying gold right now is actually GOOD for the environment and socially.

Also, you can search for a Nature of Things episode from CBC (they have them all available online on their website, like Youtube). A year or so ago they did a show on gold (and oil) mining in Peru and all its destructive impacts socially, and particularly on indigenous populations.

Higher Price of Gold

That’s good to know, Mobius. As it happens, almost all the gold I have is in Canadian Maple Leafs, both because at 99.999, it’s more pure (less corrupt) than American Eagles, has less price premium (shall we pay more for less in gold and prescription drugs just because the US gov’t is run by the mega-corps?), and is maybe a bit less offensive than Kruggerands, as I know historically south african gold has been mined under pretty oppressive working conditions. Investing is not a black & white world and never will be – but I think it does help to try to make choices that support the better end of the spectrum, to the extent that you are able to identify which end is up.

Gold....

A year or so ago they did a show on gold (and oil) mining in Peru and all its destructive impacts socially, and particularly on indigenous populations.

[/quote]

This is one of those areas where you really have problems when you don’t have strong property rights. There is no one to protect the rights or property of the poorer population. Very sad.

[quote=kelvinator]

both because at 99.999, it’s more pure (less corrupt) than American Eagles,

[/quote]

Eagles and Krugarands have one advantage that may or may not become an issue. They can be circulated as money without having to protect them near as much as the pure coins. They are a alloy that makes them strong enough to survive circulation without being chipped away. For 1oz that might not be realistic, but the 1/10th oz coins – maybe.

If you really want to protect the land, I think Mark_BC has it right, buy it, protect it, and push for strong property rights that allow you to protect it.

rhare wrote:Eagles and

[quote=rhare]
Eagles and Krugarands have one advantage that may or may not become an issue. They can be circulated as money without having to protect them near as much as the pure coins. They are a alloy that makes them strong enough to survive circulation without being chipped away. For 1oz that might not be realistic, but the 1/10th oz coins – maybe.
[/quote]
That’s what a guy at the local coin dealer said, and recommended I buy bars rather than coins. One ding on the coin and its value gets diminished. He said even if the bar is bent he still has to accept it because the bar is a commodity vs. a coin and not legal tender. I still go for coins though because I will be careful with them and they might possibly have certain legal advantages regarding taxation and cross border movement in the future, who knows.
[quote=rhare]
If you really want to protect the land, I think Mark_BC has it right, buy it, protect it, and push for strong property rights that allow you to protect it.
[/quote]
Hey, I never said that second part. Strong private property rights here in BC have been disastrous for the environment. Back in university way back when we went through all the theory explaining why allocating private property rights for various resources like forests and fisheries would end up promoting the best management. We had all the nice two dimenional charts "proving" it and I bought it hook line and sinker. However, since then in the times when we have moved to increase private property rights the opposite has happened. In fisheries, it didn’t work quite as the charts had predicted… And with forests, well, that land just gets spun and sold off for lucrative real estate development with zero consideration for any social and environmental externalities that may result (or any alternative future uses we might want from that land). We just had a huge swath of south eastern Vancouver Island sold off for private real estate, now we can’t access that land, it’s gone. The private enterprise free marketeers really ought to be 100% certain that their charts actually do reflect the real world because once you sell off land and it gets carved up for real estate, there’s no going back, it’s gone … forever, essentially.
In BC the publicly owned Crown land has been much better managed, but of course even there have been major problems, but not because of the fact that it is pubicly owned and is therefore subject to the "tragedy of the commons" (which it isn’t, because the land use is heavily regulated), but because the other values that the land offers — wildlife, scenery, biodiversity, water, salmon, recreation, etc etc, were not incorporated into our provincial policies for land use (the whole province was carved up into a "tree farm" long ago), and this would be even worse if those forestry companies (who instead have private ownership to cutting rights only, and all the responsibilities that go along with these) had been granted full private ownership of those lands.
The best solution seems to be somewhere in the middle, a hybrid of private ownership of some rights with ultimate public ownership, and of course some of the land should be privately owned. But every country is different, we still have lots of wild land left up here, as does Peru. However, Peru still has aboriginals living on the land, whereas here they were assimilated a long time ago. There are ongoing land use negotiations to give back big chunks of land to the various native groups, which is progressing slowly. But that land is not really "privately held" as in a corporation that owns it and manages it for monetary profit, rather it’s just a different "government" that has legal entitlement to that land, the native governments.

Mark_BC wrote:Thanks for

[quote=Mark_BC]
Thanks for that info Mobius. Here are my thoughts. By buying gold now, we are in a small way speeding up the demise of the highly destructive ponzi scheme which is destroying the planet by artificially pricing energy and resources low. And then when gold gets repriced much higher after the system collapses, then I will sell it and buy things like productive land and ecosystems (which I will treat well). [/quote]
I hear you Mark. I’ve always been on the left side politically speaking, and I have considered the ecological impact of my consuming. For instance we make choices : no dishwasher, only 1 car (1 bike to work 9km away) and watch our energy consumption quite vigilantly. I consider PMs as financial self-defence for my self and for my children.
[quote=Mark_BC]
Also, you can search for a Nature of Things episode from CBC (they have them all available online on their website, like Youtube). A year or so ago they did a show on gold (and oil) mining in Peru and all its destructive impacts socially, and particularly on indigenous populations.
[/quote]
I grew up with the Nature of Things and I love David Suzuki! (Only CBC show from the late 70s I bothered watching- and just hated the Beachcombers & the King of Kensington)
The long & the short of it is: Do what you feel is right. It’s hard to weigh up all considerations, but these are not normal times.
Hasta la proxima,
Joanne

Strong property rights means less reliance on hope...

[quote=Mark_BC]

Hey, I never said that second part. Strong private property rights here in BC have been disastrous for the environment.

[/quote]

You just said you want to own land and you want the job of protecting it, and I’m assuming as you see fit? In order to do that you have to have strong property rights that protect your ability to do so.

If you don’t have strong property rights, then the when someone next to you decides to set up a strip mine and pile tailings next to you, well, too bad, you may not have a right to fight them for damage to your property. Or you might just get thrown off your land if the government decides that the benefits of mining outweigh your little farm operation.

I find it amusing that you complain about private rights, want them yourself, and then give a two great examples of the abuse of publicly owned land. First, you have the case where the government ended up in possession of lots of land and decided to sale it off to the highest corporate bidder, probably in very large chunks only, so that no private small citizen could own it. Next you describe again, the government leasing or selling public land to the highest bidder.

So question – what was the common factor in both of those? Government/public ownership of the land. The problem you have is assuming that governments will act to protect your property better than you will. If you really want to protect large swaths of land, set up a foundation to buy it and hold it. It’s much more likely to be well managed since you have a vested interested in protecting it and have skin in the game since you presumably had to fund it.

Instead, if you leave problems like this to government bureaucrats who if your lucky will have your same ideals and protect it, but then just one election or appointment away and it can be destroyed by a single person or small group who does not share your goals.

That is the problem with handing over your rights to governments, you have to hope things work out.

So no, you didn’t say strong property rights, but if you don’t have them you won’t be protecting that land, you will be hoping you can protect it.

rhare wrote:You just said

[quote=rhare]
You just said you want to own land and you want the job of protecting it, and I’m assuming as you see fit? In order to do that you have to have strong property rights that protect your ability to do so.
[/quote]
Yes, that’s why I said that I believe that some of the land should be held with strong property rights. But just because I have a strong environmental ethic and would improve the ecological "health" of any private land I hold (likely to the detriment of alternative monetary profits I could receive from doing otherwise) doesn’t mean that others would do the same. Here, when forest land has been sold off privately, some new land owners treat it well, some don’t. And on the portion of the landscape that has been legitimately decided to be private, that’s all good IMHO.
[quote=rhare]
If you don’t have strong property rights, then the when someone next to you decides to set up a strip mine and pile tailings next to you, well, too bad, you may not have a right to fight them for damage to your property.
[/quote]
Interestingly, that is the exact situation we are in. We have a couple acres of productive riverfront land on Vancouver Island, where we plan to weather the economic storm if needed. Unfortunately, our riverbank is a cut bank, and each year we lose about 5 feet of bank. The land further up ther river, all the way up to the tops of the mountains, is privately held by forest companies, and let’s say … they’ve been taking a fair amount of timber out of there lately…. from the water you can see that the whole area has been stripped.
The question is, is the increased erosion we are experiencing (and would have to pay about $20,000 to fix) a result of the increased removal of trees from up there, or is it merely natural variations? And does climate change have an impact in the storm intensity as well? How can these factors be taken into account to compensate us for this expense? Should we sue the forest company? How would we be able to demonstrate in a court of law that their activities have cost us money? How could we quantify that, like say they are 35% responsible? Law suits are ugly. Only lawyers win. And how could we quantify the impacts from shifting climate patterns resulting from CO2 emissions? Are we going to go to a court of law and as a result tax every single person in the world who buys gasoline 0.0000000001 cents for their contribution to the cost of the increased erosion of our riverbank? How could this be quantified? Isn’t regulation the much better and easier solution?
I don’t know what we are going to do, and if it takes down the big cedar tree and jumps to the other side it is going to be a mess. If that land was held by the crown, it would have never been allowed to be treated that way, so close to people living below.
[quote=rhare]
I find it amusing that you complain about private rights, want them yourself, and then give a two great examples of the abuse of publicly owned land. First, you have the case where the government ended up in possession of lots of land and decided to sale it off to the highest corporate bidder, probably in very large chunks only, so that no private small citizen could own it. Next you describe again, the government leasing or selling public land to the highest bidder.
[/quote]
Firstly, what I complain about is the idea that all land should be privately held, not that there shouldn’t be any private land. And that big chunk of land was owned privately by big forestry companies for a very long time, managed not too badly, because had special status in that it could only be managed for forestry. Last year there was some inside deal with a government official (our provincial gov’t is all pro-development and pro-privatization), and they got the green light to sell it all off for residential development with NO consideration for other values (but first they go in to to rape and pillage, then sell it off for development). Selling off Crown land is much more difficult, thankfully (for now).
[quote=rhare]
So question – what was the common factor in both of those? Government/public ownership of the land. The problem you have is assuming that governments will act to protect your property better than you will.
[/quote]
Well the only reason we had any wilderness land left to create new parks recently as public attitudes towards the environment shifted over the last few decades was because the vast majority of the land was held publicly. If it had been allocated privately beforehand there would be virtually no chance of making the changes we have done in the last 10 years. I just don’t understnad how grizzly bears can be expected to be accounted for in any private ownershiop scheme when they roam over thousands of square miles of range. So therefore, should we instead just let them go extinct because they don’t fit into the workings of some private enterprise economic theory?
[quote=rhare]
If you really want to protect large swaths of land, set up a foundation to buy it and hold it. It’s much more likely to be well managed since you have a vested interested in protecting it and have skin in the game since you presumably had to fund it.
[/quote]
That money comes from???

Always tradeoffs - but private generally = better stewardship

I agree all of the issues are trade-offs. I was primarily pointing out that public stewardship by government may not be any better than private stewardship. I prefer to move the control much more towards private than government, and direct ownership generally tends to result in better stewardship. At least you tend to pay more attention.[quote=Mark_BC]
That money comes from???
[/quote]
The same place it does now, you. You either pay taxes and hope the government does what you want, or you do it yourself or with your community. You decide what is worth fighting for on a direct basis and direct your money to that purpose.

Facts stated can be used to reasonably justify gold confiscation

These facts can, and likely will, be used to justify governmental gold confiscation. Only a small percentage of the gold mined is put to bona fide industrial use. The rest just sits around. And, as a virtually "noble" (non-chemically reactive) elemental metal, very little gets "consumed" in the conventional sense of the word. No non-radioactive element ever gets truly consumed, except in an Eiensteinian nuclear process; but they can become more expensive to reclaim than they’re worth. I read a superset of the above stated facts in National Geographic a year or two ago.If news stories with these facts appear in the mainstream media, especially cable television, it will be a final warning that governmental gold confiscation is imminent.